SBP 3QFY13 Report: good advice, bad timing

Just like the first two quarterly reports for the outgoing fiscal, the central banks latest report on The State of Pakistan Economy comes a little too late. Much of the newsworthiness of the report has been castrated, since the Economic Survey FY13 and FY14 budget has already announced some the key year-end numbers such GDP growth and its breakup and the fiscal deficit.
Arguably, the delay provides another hint of the fleeting independence of the central bank, which it had been losing in bits and pieces during the tenure of the previous government. It seems that process is set to continue under the PML-N.
Without further speculation over the institutions decay, let us turn focus to the silver lining of the latest published report which is the pickup in large scale manufacturing growth during the third quarter and some credit extended to the private sector despite governments heavy reliance on banking system for deficit financing.
"Loans to private businesses have increased from Rs42.9 billion in Jul-Mar FY12, to Rs165.1 billion in the same period this year; within this, fixed investment loans to the industrial sector have increased considerably," highlighted SBP.
SBP attributed this to the quantum of monetary easing by 250 bps since August 2012. But on the other hand, increased private credit re-routed government from commercial banks to the central bank to fill its appetite.
That is not a good omen and can reverse the process of credit easing by triggering inflation. But the good news is that inflation is at multi-years low, so inflationary threat of monetary expansion may not haunt those at the helm of SBP.
Still, the external sector woes are paramount and shaking the macroeconomic fundamentals. 3QFY13 exposed the fragility of the current account surplus that was reported in the first half of the fiscal, as in the absence of inflows from the Coalition Support Fund, a slight decline in remittances turned it into the deficit of over a billion dollars in the third quarter. The decline of more than $2 billion in foreign reserves that ensued has built pressure on the rupee-dollar parity even though it has remained stable so far.
SBP emphasised that the underlying macroeconomic challenges should be addressed through decisive structural reforms. The immediate risks identified by the SBP are high fiscal deficit and its financing, providing comfort to the foreign exchange market in FY14, institutional strengthening of tax authorities, a balanced approach to energy reforms, commercial orientation to PSEs reforms, increasing risk appetite of commercial banks and immediate steps to increase power generation.
The newly formed PML-N government is vocal and confident in addressing majority of these issues however the budget put forth by the government has been widely criticized for lacking on reform agenda. The Finance Ministry will have its work cut out to accomplish what it has already promised through its manifesto and rhetoric.